Congratulations on Your PPP Loan! Now What?

 In Business Law, Non-Profits

Maximizing Forgiveness of Your PPP Loan

The second round of Paycheck Protection Program (PPP) funding is available, so now is a good time to take a closer look at the CARES Act and SBA guidance to understand how to maximize your potential forgiveness. 

Please note that the PPP loan provisions of the CARES Act are fairly complex and have been simplified for the purposes of this post. The purpose of this post is to provide you with general information about the overall structure of the PPP loans and highlight the key concepts and questions related to forgiveness. If you have received a PPP loan and have specific questions about any of these issues, please discuss them with your banker, legal counsel, or other professional advisors.

What costs and payments are forgivable? 

Generally, your entire PPP loan amount is forgivable if you use it for the approved purposes during the 8-week period following the date on which the bank first disburses the loan proceeds to you. 

The list of approved purposes includes:  

  • payroll costs (including cash and non-cash compensation)
  • interest on any mortgage obligation (for personal or real property)
  • rent under any lease (for personal or real property)
  • utilities (including electricity, gas, water, transportation, telephone, and internet service)

There is an open question about how to interpret the phrase “costs incurred and payments made” in the CARES Act provision about forgiveness. In other words, do the amounts have to be both incurred and paid during the 8-week period or can the amounts be either incurred or paid? 

Actually, we think the “costs incurred” phrase applies (only) to payroll costs (since the statute generally refers to this as a “cost”) while the “payments made” phrase applies (only) to the payment of interest, rent, or utilities (since the statute generally refers to each of these as “payments”). Which means you would request forgiveness for (a) payroll costs incurred (but not paid) during the 8-week period and (b) interest, rent, and utility expenses paid (regardless of when incurred) during the 8-week period. This interpretation appears to be in line with the SBA’s overarching focus of keeping workers paid and employed, because the loan funds would be used to pay employees for their work during the 8-week period (since this is when the payroll costs are incurred, even if they are paid later). However, we hope that the SBA will provide additional guidance on this to avoid any confusion or disagreement over varying interpretations. 

What costs and payments are not eligible for forgiveness? 

Overall, your payroll costs must comprise at least 75% of the total forgivable amount. In other words, any payments for mortgage interest, rent, and utilities in excess of 25% of the amount of your request will be excluded (and must be repaid). 

Additionally, you cannot request forgiveness for any cash compensation paid to an individual employee in excess of an annualized salary of $100,000 (prorated to $15,384 for the 8-week period). However, due to the confusion over the “costs incurred and payments made” language discussed above, it is unclear how you should treat bonuses or commissions that are earned (or incurred) during the 8-week period but paid later — especially if it is possible that they will not be paid (in full) for any reason. 

Finally, the amount of your forgiveness will be reduced if you (a) decrease the salary by more than 25% of any individual employee who earned an annualized salary of less than $100,000 in 2019 or (b) decrease your total number of employees during the 8-week period. However, you can avoid any reduction by simply increasing the salary or rehiring (or replacing) the employee before 06/30/20. 

What about self-employed individuals? 

Not surprisingly, there are (somewhat) different requirements that apply to sole-proprietors and self-employed individuals. 

More specifically, they can only request forgiveness for payments of mortgage interest, rent, and utilities if they made expenditures for these in 2019 (i.e. claimed or are entitled to claim a deduction for them on their 2019 Form 1040 Schedule C). The SBA says that this limitation is because the purpose of the PPP loans are “to support ongoing operations” and not for business expansion. 

Additionally, the SBA will issue additional guidance (hopefully soon) for sole-proprietors and self-employed individuals who did not operate in 2019 (and, thus, will not file a 2019 Form 1040 Schedule C) but were eligible because they were in business on 02/15/20

What is the process for requesting forgiveness? 

Generally, you must submit a request to your lender (along with the necessary documentation and information), and your lender will determine what portion of your loan (if any) is eligible for forgiveness. 

However, the CARES Act does not provide much in the way of instructions or direction for how or when this is expected to occur. In fact, the CARES Act says: ” { the SBA will provide additional guidance }”. So we should expect to learn more about this process in the coming weeks. 

Also, it is important to communicate with your lender about any specific forms or requirements they have for loan forgiveness, and to make sure that you understand what documents and information you will need to provide so you can be prepared. 

If I received a PPP loan, can I still defer my payroll taxes? 

Yes, you can (still) defer your qualifying payroll taxes if you received a PPP loan. However, once you receive a decision from your lender about your request for loan forgiveness, you are no longer eligible to defer payroll taxes (whereas those without PPP loans may defer payroll taxes until 12/31/20). Either way, as with everyone else, 50% of the deferred amount is due on or before 12/31/21 and the other 50% is due on or before 12/31/22. 

What else do I need to know? 

If you have any concerns about whether or not a given use of funds is appropriate, it is best to take the conservative approach (rather than risk misusing the funds). In other words, you do not have to use all of the loan proceeds during the 8-week period. 

Any unused funds must be repaid within 2 years and will accrue interest at 1% (although payments are deferred for the first six months), which is a very inexpensive loan. Alternatively, if you would prefer to be debt-free, you can simply use the unused funds to repay the outstanding balance (which should be the same amount as your unused funds, although you may owe a small amount of accrued interest, as well). 

Learn more at our webinar:

Join Catalyst Law for a LIVE WEBINAR along with Q&A on Tuesday, May 5th, at 3:00 pm, with Andy Furrow and Craig Hill from Beneficial State Bank and Scott Bossom from Columbia Bank, to learn more about how to maximize your PPP loan forgiveness.

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